Gadens Regulatory Recap – 24 September 2024

This edition of the Gadens Regulatory Recap highlights recent developments from ASIC, APRA, and ACCC including various enforcement actions taken by the regulators.

ASIC

1. ASIC calls on product issuers to review distribution practices for DDO compliance: ASIC is urging product issuers to improve their distribution practices following a review that found significant issues with how products are being marketed and sold. The review, covering 19 issuers of high-risk financial products from October 2023 to August 2024, highlighted problems such as inadequate due diligence on third party distributers, reliance on ineffective marketing strategies, and poor-quality consumer questionnaires.

ASIC’s Report 795 revealed that many issuers lacked proper monitoring and training, leading to potential consumer harm from products that do not meet their needs. In response, ASIC has recommended improvements in areas such as distributor selection, staff training, and marketing practices. The review also led to two interim stop orders due to the use of flawed questionnaires which were revoked after corrective actions were taken. Updates to Regulatory Guide 274 were also released to clarify guidance on target market determinations without requiring issuers to revise their TMDs.

2. ASIC to target misconduct in banking and superannuation sectors: ASIC’s Enforcement and Regulatory Update for January 2024 to June 2024 revealed strong performance in its enforcement actions with the greatest success in targeting unconscionable conduct relating to interest rates in financial transactions. It had a 95% success rate in civil and criminal prosecutions, securing $32.2 million in civil penalties and obtaining nine criminal convictions. During this period, ASIC launched 63 new investigations, initiated 12 new civil proceedings and completed 550 surveillances with a primary focus into crypto-asset businesses to clarify regulated products and determine where an AFSL is required.

Key highlights of the update include ASIC’s review of large home lenders’ support or customers in financial hardship which found a substantial lack of focus on customers. Specifically, that lenders made it difficult for customers to report financial hardship, had complex assessment processes, failed to communicate effectively, and did not provide adequate support for vulnerable customers. ASIC also conducted an assessment of superannuation trustees’ efforts, finding that there are substantial risks to retirement outcomes stemming from superannuation remaining in consistently underperforming investment options. To address this there is a call for trustees and financial advisers to place greater emphasis on evaluating and improving the performance of choice superannuation investment options.

3. ASIC proposes a five-year extension for three legislative instruments expiring in October 2024. These are:

• Class Order [CO 14/923] on record-keeping for AFS licensees when giving personal advice, which requires AFS licensees to maintain records when providing personal advice to retail clients;
• ASIC Corporations and Credit (Breach Reporting – Reportable Situations) Instrument 2021/716, which excludes certain forms of non-compliance from being classified as ‘significant’ breaches, while allowing extended reporting for certain breaches linked to previous reports; and
• ASIC Credit (Breach Reporting – Prescribed Commonwealth Legislation) Instrument 2021/801, which defines Commonwealth laws considered core obligations under the National Consumer Credit Protection Act, requiring credit licensees to report significant breaches.

ASIC has deemed the instruments to be efficient, effective, and integral to the legislative framework. The proposal includes converting [CO 14/923] to a legislative instrument format and consolidating the two breach reporting instruments into a single document. ASIC invited feedback on the effectiveness of these instruments and any necessary amendments, which closed on 4 September 2024.

4. ASIC enforcement activity: ASIC has been active in the enforcement space in the last fortnight.

• During the first six months of this year, ASIC prosecuted 78 individuals for failing to assist registered liquidators, with fines of more than $430,000 imposed. These enforcement actions were taken because company officers and other individuals failed to provide registered liquidators with access to company books and submit a report on company activities and property (ROCAP).
• FXOpen Aus Pty Ltd’s has been cancelled after an investigation identified serious concerns about the inadequacy of its human resources to provide financial services and to carry out supervisory arrangements. It also failed to maintain competence to provide financial services, as well as its ‘key person’ condition on its AFSL.
• A former Melbourne financial planner, Bradley Grimm, has been sentenced to 18 months’ imprisonment for engaging in dishonest conduct while running a financial services business. On five occasions, the individual transferred funds between two of his clients’ SMSFs to three separate companies of which he was the sole director. He also transferred clients’ funds to a hedge fund in which he had a personal interest, without advising his clients of this interest.
• The former director of Reiwa-Capital, Russell Sandiford, has been sentenced to two years and 8 months’ imprisonment for dishonest use of investor funds. Over two and a half years, 74 clients paid $440,909 to the former director for investing purposes. However, these funds were primarily used for the director’s personal interests including gambling, personal entertainment and other personal expenses. Only $6,316 of the $440,909 was paid back to the investors.
• Olritz Financial Group Oty Ltd’s AFSL has been suspended because the company has not carried on a financial services business since May 2023.

APRA  

5. APRA consults on minor updates to the prudential framework for ADIs, insurers and RSE licensees: APRA is seeking submissions for minor updates to the prudential frameworks for ADIs, general, life and private health insurers. The proposed amendments relate to technical clarifications to the framework and are not considered substantial changes. The update is intended to ensure technical and clarifying changes to the prudential framework can be made in a timely manner. Submissions must be lodged by 4 October 2024.

ACCC

6. Stronger penalties and enforcement powers against telcos breaching the law: The ACCC has issued the ACCC Telecommunications (Infringement Notices) Guidelines 2024, effective from 30 August 2024, under the Telecommunications Legislation Amendment (Enhancing Consumer Safeguards and Other Measures) Act 2024, which came into force on 2 June 2024. These guidelines outline the ACCC’s enforcement approach for breaches of the ‘carrier separation rules’ in the Telecommunications Act 1999 (Cth).

The carrier separation rules require superfast network operators to offer wholesale-only services unless exempted by the ACCC, preventing them from providing retail services over their own networks. Additionally, operators must ensure non-discriminatory access to wholesale services, aiming to foster competition and enhance consumer choice in the fixed-line broadband market.

The guidelines detail factors which the ACCC and authorised infringement notice officers may consider when issuing notices for violations. These factors include the severity, duration, and impact of the conduct, as well as the need for deterrence and public education. Each matter is to be assessed on a case-by-case basis.

The guidelines follow recent legislative changes, as outlined in the ACCC media update, which empower the ACCC to issue infringement notices to network operators, intermediaries, and property managers for non-compliance with carrier separation rules. The amendments also increased penalties for serious breaches to a maximum of $10 million per violation. Current penalty rates under an infringement notice are $18,780 per contravention for corporations and $3,756 for individuals, reflecting the ACCC’s strengthened role in promoting compliance and protecting competition in the telecommunications industry.

7. ACCC publishes updated guidelines to clarify the process of interim authorisation: The ACCC released its Guidelines for authorisation of conduct (non-merger) to clarify expectations around interim authorisation requests and decisions. Interim authorisations are used as a tool by the ACCC to allow conduct to occur prior to any substantive assessment of an application taking place. Any requests received for interim authorisations must be accompanied by compelling reasons in support. The updated guidelines clarify how the ACCC will approach applications, their relevant considerations and why an interim authorisation may be granted.

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Authored by:
Sinead Lynch, Partner
Caroline Ord, Partner
Matthew Bode, Partner
Kelly Griffiths, Partner
Michael Kenny, Partner
Daniel Maroske, Partner
Kate Mills, Partner
Tehlyn Murray, Associate
Ellie Pitcher-Willmott, Lawyer
Martin Van Aardt, Lawyer
Bronte Anderson, Lawyer
Isabella Parsons, Graduate